Beige Book Report: Boston
January 14, 2015
Sales or revenues are ahead of year-earlier levels according to most First District business contacts in the manufacturing, retail, and advertising and consulting sectors. Commercial real estate markets are steady to improving and most residential real estate markets in the region continue to see price increases and sales declines. With a few exceptions, manufacturers and retailers are not increasing employment, while advertising and consulting firms continue to add modestly to headcounts. Cost pressures vary, with selective price increases planned by several respondents. The 2015 outlook is positive for almost all responding firms.
Retail and Tourism
Retail respondents this round report December or Q4 year-over-year comparable-store sales ranging from a low single digit decrease to an increase of slightly over 7 percent; the decrease reflects extra-strong year-earlier sales as a result of Hurricane Sandy rebuilding. Three of these contacts end their fiscal year on or near December 31, and preliminary analysis shows 2014 total sales down 1 percent to up almost 6 percent compared to 2013. While overall business is good, there has been some softening in the apparel categories; demand for home furnishings and home improvement categories remains strong. One contact characterizes the current daily retail environment as consisting of "higher highs and lower lows." As in the previous round, some respondents say their prices remain steady, while others cite price changes for some items of plus or minus 1 percent. Based on their own manufacturing costs and vendor prices, one contact says that prices for fall 2015 merchandise will be up about 3 percent overall from fall 2014. Most retail respondents are optimistic about the outlook for 2015, given that business is currently good and consumer sentiment seems more positive, partly because the cost of oil is low.
The Boston area continues to enjoy a strong boost from travel-related spending. Hotel occupancy rates for 2014 are high and combined with higher average room rates, the preliminary estimate is that 2014 hotel revenues will be up almost 10 percent over 2013, which was a record-setting year. Through October, museum attendance was up 14 percent year-over-year, and contacts note many bookings of restaurant and museum space for year-end functions. 2015:Q1 will be stronger than 2014:Q1 due to more corporate meetings and conventions, and hotels have strong advance international bookings. The initial projection for 2015 is a 7 percent increase in hotel revenues, with a slight drop in occupancy rates from record highs compensated for by higher average room rates.
Manufacturing and Related Services
Of the 11 manufacturing firms contacted this cycle, all but one report stronger sales. The exception is a frozen food producer who attributes the weakness to a highly competitive market. Otherwise, many contacts express surprise at how strong demand has been in 2014. For example, one firm says that sales of mail-related devices and services was up in the fourth quarter, reversing years of decline. A manufacturer of testing equipment says sales are strong overall but flat in China, a big change from historical annual increases of 20 percent. By contrast, a toy manufacturer says problems at West Coast ports has hurt sales as they couldn't get some products to market.
Only one of 11 contacts reports serious materials cost pressure; that contact cites sharp increases in chemical prices and says the firm will try to raise their sales prices to offset the increased costs. Four contacts indicate the strengthening dollar is reducing profits or raising costs for them overseas. A semiconductor manufacturer notes that the rising dollar reduced dollar sales by about 1.2 percent in 2014. No firms report any significant changes in inventories. Most are trying to lower inventory costs; however, a semiconductor maker wants to increase inventories but a tight supply chain makes that difficult.
Only one contacted manufacturer reports lower employment; they closed their direct sales channel which led to a 400-person reduction in headcount. A pharmaceutical firm is adding to New England employment. On the negative side, no firms report significant upward revisions to their hiring plans and five cite no significant headcount increases. A semiconductor manufacturer with sharply higher sales is increasing overtime rather than headcount. Capital expenditures are steady or up at all but one contacted firm; the exception is a publishing company which says it is considering reducing investment to build up a reserve for future investments. Some contacts do report unusually high levels of investment but generally say they are consistent with long-term plans and not due to high frequency changes in demand.
The outlook is positive for all respondent manufacturers, even though three contacts specifically mention Europe as a cause for concern. One semiconductor manufacturer predicts a fall in sales in 2015 but as payback for above-trend growth in 2014.
Selected Business Services
Consulting and advertising firms experienced varying positive levels of growth this past quarter. Growth ranges from moderate--for a high-end economic consulting firm as mortgage-backed securities litigation finally slows--to rapid, for a particularly well-positioned healthcare consulting firm. A second healthcare consulting firm experienced a strong rebound from a slow third quarter, as hospitals figured out their budgets and demanded more help with compliance. A strategy consulting firm reports strong year-over-year growth, but is down modestly from last quarter, as private equity due diligence work returns to historically normal levels. An advertising materials firm continues its trend of growing with the economy, and capped off the year with their strongest quarter in 2014.
Consulting firms are seeing moderate to modest increases in costs, although the bulk of their expenses are in personnel and rent, and wages in these firms are generally increasing in proportion to the level of growth the firm is experiencing. Contacts generally adjust their prices up once a year to pass the majority of costs along, so early 2015 will see most firms' prices for these services increase from 0 percent to 5 percent. An advertising materials firm will have to adjust their cost structure in early 2015 in anticipation of a revision in UPS and FedEx freight calculations, but they are unsure how much resistance they will face as they try to pass this on to customers.
All contacts increased personnel modestly in 2014, and plan on further increases in 2015. Health care and economic analysis contacts cite plenty of slack in labor markets for consultants and analysts at all levels, but say that tech and data analyst positions continue to be competitive to fill, a sentiment echoed by an advertising materials contact who notes continuing difficulty filling e-commerce related positions. A strategy consultant notes decreased interest in strategy consulting by MBAs.
All contacts are bullish on the U.S economy, and are optimistic about business conditions for the next year. The high end economic consultant expects flat to modest growth for next year, but says the firm has been operating beyond capacity, and looks forward to the chance to "absorb" their recent success. Health care consultants have seven-figure deals in the pipeline, and anticipate high growth in 2015, despite general concern over federal budget and regulatory agencies efforts to continue rolling out the Affordable Care Act. Advertising materials and strategy consulting firms both anticipate continued robust growth for 2015, and cite only potential geopolitical turmoil as a risk factor.
Commercial Real Estate
Commercial real estate markets are steady or improving in the First District. According to contacts in Boston, office leasing fundamentals are unchanged since the last report and improved modestly on average compared with a year ago. Contacts continue to be impressed by the strength of demand for commercial property in Boston among foreign investors, who continue to pay prices that reflect highly optimistic expectations concerning growth in operating income. A regional lender to commercial real estate posted its best year yet in terms of loan volume, despite a very slow fourth quarter. A commercial real estate brokerage in Portland also had a record year in 2014 in terms of total revenues, a year that ended with very strong investment sales activity in the fourth quarter. Also in Portland, construction activity remains robust in the retail, residential, and hospitality sectors, while speculative office construction is not expected to occur for at least another year. In Providence, leasing deals under negotiation promise to boost absorption of office space in the near term, and office leasing fundamentals improved on net in 2014.
Concerning the outlook, Boston contacts expect investment sales activity to remain robust, even if short-term or long-term interest rates increase in 2015. One Boston contact wonders whether growth among the city's tech start-up firms can be sustained in 2015, noting attendant risks for office demand in the Seaport District. The 2015 outlook is favorable for Portland's commercial real estate market and cautiously optimistic for the Providence market.
Residential Real Estate
Closed sales of single family homes declined in November in at least four of the six states in the First District compared to November 2013. Vermont saw an increase in sold homes; contacts in New Hampshire were unavailable. Sales also dipped in the condominium (condo) market in all responding states. Median sales prices rose in November in both single family and condo markets regionwide, with the exceptions of Maine, where prices decreased for single family homes, and Connecticut, where condo prices declined. In Massachusetts, prices have risen year-over-year in 25 of the last 26 months for single family homes and 17 of the last 18 months in the condo market. Contacts in Massachusetts say the driving forces are a shortage of inventory and steady consumer demand. The level of inventory heading into December in Massachusetts is the lowest in a decade, with only a 4.6 month supply for single family homes and a 2.0 month supply in the condo market. November is the 33rd consecutive month of year-over-year inventory decline in the Massachusetts single-family home market and the 49th consecutive decline in the condo market. In at least three other states, inventory declined in both the single family and condo markets; months of supply increased in Rhode Island. Realtors say they are cautiously optimistic because they remain busy; they hope interest rates will remain low and say markets will show further significant improvements only when high paying jobs become more available and new listings provide more options for buyers.